SECTION III CLASSIFICATION OF REAL AND PERSONAL PROPERTY Section 3-Page 1
IS THIS REAL... OR PERSONAL? As we begin our examination of the appraisal of business personal property, we should first define our topic. Business personal property is typically identified as all property used in connection with the production of income that has not been classified as real property. Frequently, it is difficult to draw a fine line between what is treated as real property and what is treated as personal property for property tax purposes. In many cases, the appraiser must rely on the owner's statement of intent. Items that may appear to be permanently attached to realty may not be appraised as realty and should be classified as personalty. In making appraisals of machinery & equipment, a good rule-of-thumb is to classify all property and investments necessary for the operation of the machinery and equipment as personalty. Examples of items that may appear to be realty but should be considered personal property in certain situations are: l. Wiring 2. Venting 3. Flooring 4. Special climate control (Heating and air conditioning systems associated with particular equipment or product) 5. Conveyors 6. Boilers and furnaces 7. Shelving and displays 8. Leasehold improvements (owned by lessee) It is important to remember that there are no absolutes in making the determination of whether assets should be classified as real or personal property. Frequently, the appraiser must examine leases and other documents to determine the intent of the owner of the property. In addition, the appraiser may have to determine how the property is affixed to the realty and also, whether the property is there for the benefit of the process or for the benefit of the employees or the building. Generally, business personal property includes, but is not limited to, the following categories: 1. Inventories A. Raw materials B. Goods in process of manufacturing C. Finished goods D. Supplies (office, maintenance, janitorial, manufacturing) E. Packaging materials F. Fuels G. Spare parts Section 3-Page 2
2. Depreciable Assets (Fixed Assets) A. Machinery and equipment B. Office furniture, fixtures, and equipment C. Construction work in progress (including interest during construction) D. Leasehold improvements E. Software packages (tangible) F. Tools, dies, molds G. Motor vehicles (including mounted equipment) H. Pallets and containers 3. Intangible Personal A. Leasehold interest in exempt real property WHY IT IS IMPORTANT It is most important that all taxable property be assessed only once as either real or personal, and that property is classified as either real or personal uniformly throughout each county. Of slightly lesser importance is whether the property is classified as real or personal property. In other words, however property is classified, the assessor must ensure that all taxable property is uniformly assessed. When the assessor believes that property has not been assessed, it is then determined if the property has been listed. All taxable personal property must be listed each listing period. Real property is different. Land does not have to be listed at all, but improvements to the land must be listed once during the listing period after they are made. After this initial listing, the improvements do not have to be listed again. Instead the assessor carries these improvements forward each year. This type of system is called a permanent listing system. All counties were required to adopt a permanent listing system for real property by tax year 2004, however many counties adopted permanent listing systems prior that year. After permanent listing systems were adopted in each county, taxpayers were relieved of the duty to list real property in their respective counties. Again, the exception for this is real property improvements. Annually, during the listing period, owners of real property must furnish the assessor with information concerning improvements on real property. Since some real property is now not required to be listed, real versus personal decisions can become very important when a discovery is made. We will discuss discovery procedures in a later section of this manual. When the assessor determines that property has not been listed, but it is taxable, the following line of questions should be proposed. 1) Is it real property? 2) No, it is personal property. Do a discovery. Stop here. Don t proceed with the next questions. 3) Yes, it is a real property improvement. Was it ever listed? 4) No, it was never listed. Do a discovery; all real property improvements are required to be listed at Section 3-Page 3
least once. 5) Yes, it was listed. Should it have been listed more than once? Real property improvements should have been listed every year prior to the adoption of the permanent listing period and may be discovered for those years that they were not listed. It is easy to see how determining classification of real versus personal property can also determine whether a discovery is proper or not. This can become one of the most controversial questions that an assessor is faced with and is a common issue with Property Tax Commission Appeals. One vital tool that can be used to minimize conflict in this area is properly written guidelines in the county s schedule of values. Section 3-Page 4
SCHEDULE OF VALUES Although this is not a real property course, it is helpful to be familiar with the basics of how real property is appraised. A schedule of values is the official document in each county, specific to each county, used to appraise real property for property tax purposes. The schedule of values is divided into different classifications of real property, land and improvements, presented to the public for appeal, and adopted by the county commissioners for each reappraisal. Many of the standards for the appraisal of real property improvements are shown as a price per square foot value. A standard warehouse may have guidelines showing $9.50 per square foot. An upgraded warehouse, possibly a refrigerated warehouse, may have guidelines showing $25.50 per square foot. The schedule of values should include a detailed description of what makes the difference in per square foot value between the standard and the upgraded and also what is included in the real property appraisal. Most conflicts arise when a county does not have clear guidelines showing what specifically is appraised as and classified as real property, and what is included in the varying square foot values. An example of real vs. personal guidelines is found at the end of this section. LEASEHOLD IMPROVEMENTS One frequent conflict related to the real versus personal property question arises when a lessee installs property in a leased space, but neither the owner nor the lessee lists the property. Many times this is because each party believes the other is responsible for listing. For example, if a barber installs his barbershop in a strip mall, the improvements that make the leased space a barbershop are typically called leasehold improvements and are assessed as personal property. One way to effectively assess both real and personal property in this situation is to appraise all strip malls as empty space, four walls and a roof, with concrete floor, minimum lighting and standard HVAC. If this is the case, then everything else; the barber chairs, partitions between the chairs, additional lavatories, mirrors, dropped ceiling, and other additions to the real property that were needed to create a barbershop from the leased space would all be considered leasehold improvements. These improvements would be appraised as personal property since they are not appraised as part of the real property and the owner of the real property does not own the improvements. Since business s property vary greatly with regards to type, quality, and quantity of additions, this four walls and a roof type real property appraisal is usually best for leased retail space. In a single strip mall, a real property appraiser might find a high-end clothing store, a dollar store, a doctor s office, and a grocery store. This type of real and personal property appraisal is usually best for a mass appraisal system. An office building or warehouse space real property appraisal would probably include more or less than the strip mall real property appraisal. The schedule of values should attempt to address what specific items are included in each real property appraisal and should attempt to address what specific items are considered personal property. If leasehold improvements are discovered as personal property, the lessee sometimes believes that the property has been assessed as real property, and therefore should not have been listed. In our example above, the barber may think that the county already appraised that section of the strip mall as a barbershop. Many taxpayers are not aware that real property improvements must also be listed. A building permit is not considered a property tax listing, even though many counties learn about Section 3-Page 5
new construction from building permits. Therefore if the property has been recently installed, but not listed, it can be discovered as either real or personal property. This section cannot possibly refer to all situations, but several guidelines may be helpful to keep in mind when real vs. personal property issues arise. 1) Have a guideline in the schedule of values clearly classifying what your county considers as real or personal property 2) As a personal property appraiser, become generally familiar with your county s Schedule of Values and discuss real vs. personal property issues with your real property appraisal department. 3) Property used as part of a process, or in place for the equipment is generally considered personal property. Special wiring, foundations, and process piping are examples of this and are typically not appraised as real property in the Schedule of Values. 4) Property used for the building, or for the comfort of employees is generally considered real property. A building appraised as a refrigerated warehouse will include property that helps keep the interior cool. It is helpful to determine what additional property is included in the refrigerated warehouse schedule. 5) The owner s intent is important to consider. If the owner intends property to be permanently attached to the real estate, then that should be taken into account. Paving will not typically be removed and is not intended to be removed; therefore it is almost always a real property improvement. A bank vault is usually permanently affixed, even if it is in a leased space. Even in these cases, it should be clearly noted in the schedule of values. 6) It can only be appraised once as real OR personal, but not both. The appraisal of personal property is an interesting and challenging endeavor. In this section we have introduced several new concepts and as we continue with the following sections of this manual, we will expand on these concepts so the importance of determining real property versus personal property will be more evident. Hopefully, this manual will assist you in making accurate and equitable appraisals for the benefit of your county s government and for the benefit of all of us as property taxpayers. Section 3-Page 6
Case Problem CLASSIFICATION - Real vs. Personal 1. First Bank of Charlotte is located in the Odd Fellows Building where space is leased for a period of 20 years. The bank's accounting records reflect the ownership of the following class of assets. Real Personal 1. Office furniture and fixtures 2. Vault door 3. Vault ventilator 4. Safe deposit boxes 5. Counters and shelving 6. Floor carpeting 7. Drive-in window (pneumatic system) 8. Card operated machine 9. Outside brick planters 10. Concrete paving 11. Built-in counters and shelving 12. Bank vault 13. Port-a-vault 14. Special light fixtures 15. Burglar alarm system 16. Wall coverings 17. Computer Your assignment is to determine which of the above items are to be classified for assessment purposes as real or personal property. For those items that could be either real or personal, be prepared to discuss why you made your choice. Section 3-Page 7
CLASSIFICATION OF SELECTED ITEMS AS REAL OR PERSONAL A General Guide In general, machinery and equipment used primarily as part of a manufacturing process (process equipment) is taken as Personal Property. Machinery and equipment which is part of the land or building improvement is taken as Real Property. Item Real Personal Acoustical fire resistant drapes & curtains Asphalt plants - batch mix, etc., Moveable Air Conditioning - building air conditioning, including refrigeration equipment, for comfort of occupants, built-in Air Conditioning - window units, package units, including, e.g., that used in data processing rooms and in manufacturing processing Airplanes ATM machines and shelters for the machines Auto exhaust systems - flexible tube type Auto exhaust systems - built-in floor or ceiling Bar and bar equipment Boats and motors - all Bowling alley lanes Boiler - primarily for process Boiler - for service of building Section 3-Page 9
Item Real Personal Burglar alarms Car Wash - all equipment Concrete plant - electronic mixing, Conveyors, tanks, etc. Construction and grading equipment (non-licensed vehicles, etc.) Conveyor systems Coolers (walk-in) - prefab, portable Coolers (walk-in) - permanent - schedule of values should address these Cold storage - built-in cold storage rooms Cold storage - refrigeration equipment Cooling towers - primary use in manufacturing Cooling towers - primary use for building Computers - all Cooking equipment (restaurant, etc.) Compressed air systems Control systems - electronic Chairs - all types Dairy processing plants - all process items Data processing equipment - all items Diagnostic center equipment (automotive) Section 3-Page 10
Item Real Personal Dock levelers Drying systems (special heating in process system) Dumpsters Dust catchers, control systems, etc. Desks - all Electronic control systems (weighing, mixing, etc) Fire alarm systems Fans - freestanding Farm equipment - all Floors, computer room Foundations for machinery and equipment Furnaces - steel mill process, etc., foundry Furniture and fixtures Grain bins, not permanently attached to realty Greenhouses - if permanently affixed Greenhouse benches, heating system, etc. Humidifiers, process Heating systems, process Hoppers - metal bin type Section 3-Page 11
Item Real Personal Hospital systems - oxygen, public address, emergency electric, closed T.V. call system, autoclave, etc. Inventories Incinerators - moveable, metal type Industrial piping, process Irrigation equipment Kilns - metal tunnel, moveable Kiln heating system Leased equipment - lessor or lessee possession Leasehold improvements Lighting - yard lighting Lifts - other than elevator Law Libraries Machinery and equipment Milk handling - milking, cooling, piping, storage Mineral rights Mobile Home does not meet definition of G.S. 105-273(13) Mobile Home meets definition of G.S. 105-273(13) Office equipment - all Ovens - food processing Section 3-Page 12
Item Real Personal Office supplies Oil company equipment - pumps, supplies, etc. Power generator systems (auxiliary emergency, etc.) Portable buildings (greenhouse, construction, etc.) Package and labeling equipment Paint spray booths Piping systems - process piping Public address systems (intercom, music, etc.) Pneumatic tube systems Railroad sidings (other than railroad-owned) Refrigeration systems - compressors, etc. Rock crusher Scales Scale houses (unless portable) Screens, movie-indoor Screens - drive-in outdoor theater Signs (including billboards, etc.) Speakers- all types, unless addressed in real property schedule Spray booths (unless built-in) Seats - theater Sound projection equipment Section 3-Page 13
Item Real Personal Sound systems Sprinkler system - fire protection Switchboard (motel, etc., - when not owned by utility) Service station equipment - pumps, tanks, lifts Tanks - if permanently affixed structure, etc. (e.g., bulk plant) Tanks - manufacturing, process, etc. Tanks - service station underground gasoline Tunnels - unless part of process system Transformer banks Towers - TV, radio, CATV, cellular, two-way radio, etc. Towers - microwave and equipment and shelters for equipment Telephone system - private Utility systems - (other than in state-assessed utilities, and other than central heating and cooling for buildings, etc. e.g., motelowned telephone switchboard systems, private railroad sidings, private water systems, emergency power generating equipment, etc.) Utility systems - buildings for private systems Vacuum system, process Ventilation systems - building improvement Ventilation systems - manufacturing, process, etc. Section 3-Page 14
Item Real Personal Vent fans - freestanding Water tanks, process equipment Water coolers - electric Wells - pumps, motors, equipment Wiring - power wiring for machinery and equipment Walls - partitions, portable Water lines - for process above or below ground Section 3-Page 15
WAKE COUNTY LIST GENERAL CLASSIFICATION OF REAL AND TANGIBLE PERSONAL PROPERTY REAL PERSONAL DESCRIPTION AIR CONDITIONING - BUILDING AIR CONDITIONING - MANUFACTURING/PRODUCT AIR CONDITIONING - WINDOW UNITS AIRPLANES ALARM SYSTEMS (SECURITY OR FIRE) & WIRING ASPHALT PLANTS ATM - ALL EQUIP. & SELF STANDING BOOTHS AUTO EXHAUST SYSTEMS FOR BUILDING AUTO EXHAUST SYSTEMS FOR EQUIPMENT AWNINGS BALERS (PAPER, CARDBOARD, ETC.) BANK TELLER COUNTERS - SERVICE AREA & RELATED BANK TELLER LOCKERS - MOVEABLE OR BUILT-IN BAR AND BAR EQUIPMENT - MOVEABLE OR BUILT-IN BARNS BILLBOARDS BOATS AND MOTORS - ALL BOILER - FOR SERVICE OF BUILDING BOILER - PRIMARILY FOR PROCESS BOWLING ALLEY LANES BROADCASTING EQUIPMENT C-I-P EQUIPMENT CABINETS CABLE TV DISTRIBUTION SYSTEMS CABLE TV EQUIPMENT & WIRING CABLE TV SUBSCRIBER CONNECTIONS CAMERA EQUIPMENT CANOPIES - FABRIC, VINYL, PLASTIC Section 3-Page 16
CANOPIES - GENERAL CANOPY LIGHTING CAR WASH - ALL EQUIPMENT, FILTERS & TANKS CARPET - INSTALLED CATWALKS CEMENT PLANTS CHAIRS - ALL TYPES CLOSED CIRCUIT TV COLD STORAGE - EQUIPMENT, ROOMS, PARTITIONS COMPRESSED AIR OR GAS SYSTEMS ( OTHER THAN BLDG HEAT) COMPUTER ROOM A/C COMPUTER ROOM RAISED FLOOR COMPUTER SCANNING EQUIP. COMPUTERS AND DATA LINES CONCRETE PLANTS CONSTRUCTION AND GRADING EQUIPMENT CONTROL SYSTEMS - BUILDING AND EQUIPMENT CONVEYOR & MATERIAL HANDLING SYSTEMS COOLERS - WALK-IN OR SELF-STANDING COOLING TOWERS - PRIMARY USE FOR BUILDING COOLING TOWERS - PRIMARY USE IN MANUFACTURING COUNTERS/RECEPTION DESKS - MOVEABLE OR BUILT-IN DAIRY PROCESSING PLANTS - ALL PROCESS ITEMS, BINS, TANKS DANCE FLOORS DATA PROCESSING EQUIPMENT - ALL ITEMS DELI EQUIPMENT DESK - ALL DIAGNOSTIC CENTER EQUIPMENT - MOVEABLE OR BUILT-IN DISPLAY CASES - MOVEABLE OR BUILT-IN DOCK LEVELERS DRAPES & CURTAINS, BLINDS, ETC Section 3-Page 17
DRINKING FOUNTAINS DRIVE-THRU WINDOWS - ALL DRYING SYSTEMS - PROCESS OR PRODUCT DUMPSTERS DUST CATCHERS, CONTROL SYSTEMS, ETC ELECTRONIC CONTROL SYSTEMS ELEVATORS ESCALATORS FARM EQUIPMENT - ALL FENCING - INSIDE FENCING - OUTSIDE FLAGPOLE FOUNDATIONS FOR MACHINERY AND EQUIP. FREIGHT CHARGES FUELS - NOT FOR SALE (LIST AS SUPPLIES) FURNACES - STEEL MILL PROCESS, ETC. FURNITURE AND FIXTURES GAZEBOS GOLF COURSE AND IMPROVEMENTS (DRAINAGE/IRRIGATION) GRAIN BINS GREENHOUSE BENCHES, HEATING SYSTEM, ETC. GREENHOUSES - STRUCTURE IF PERM. AFFIXED HEATING SYSTEMS, PROCESS HOPPERS - METAL BIN TYPE HOSPITAL SYSTEMS, EQUIPMENT & PIPING HOT AIR BALLOONS HOTEL/MOTEL TELEVISIONS & WIRING HUMIDIFIERS - PROCESS INCINERATORS - EQUIPMENT AND/OR MOVEABLE Section 3-Page 18
INDUSTRIAL PIPING - PROCESS INSTALLATION COST IRRIGATION EQUIPMENT KILN HEATING SYSTEM KILNS - METAL TUNNEL OR MOVEABLE LABORATORY EQUIPMENT LAGOONS/SETTLING PONDS LAUNDRY BINS LAW & PROFESSIONAL LIBRARIES LEASED EQUIPMENT - LESSOR OR LESSEE POSSESSION LEASEHOLD IMPROVEMENTS (LIST IN DETAIL YEARLY) LIFTS - OTHER THAN ELEVATOR LIGHTING - PORTABLE, MOVEABLE, SPECIAL LIGHTING - YARD LIGHTING MACHINERY AND EQUIPMENT MEDICAL EQUIPMENT MILK HANDLING - MILKING, COOLING, PIPING, STORAGE MINERAL RIGHTS MIRRORS ( OTHER THAN BATHROOM) MONITORING SYSTEMS BUILDING OR EQUIPMENT NEWSPAPER STANDS NIGHT DEPOSITORY OFFICE EQUIPMENT - ALL OFFICE SUPPLIES (LIST AS SUPPLIES) OIL COMPANY EQUIPMENT - PUMPS, SUPPLIES, ETC. OVENS - PROCESSING/MANUFACTURING OVERHEAD CONVEYOR SYSTEM PACKAGE AND LABELING EQUIPMENT PAGING SYSTEMS PAINT SPRAY BOOTHS PAINTING - NO ADDED VALUE PARTITIONS Section 3-Page 19
PAVING PIPING SYSTEMS - PROCESS PIPING PLAYGROUND EQUIPMENT - ALL PNEUMATIC TUBE SYSTEMS PORTABLE BUILDINGS POWER GENERATOR SYSTEMS (AUXILIARY, EMERGENCY, ETC.) POWER TRANSFORMERS - EQUIPMENT PUBLIC ADDRESS SYSTEMS (INTERCOM, MUSIC, ETC.) RAILROAD SIDINGS ( OTHER THAN RAILROAD-OWNED) REFRIGERATION SYSTEMS - COMPRESSORS, ETC. REPAIRS - BUILDING REPAIRS - EQUIPMENT (50% COST) RESTAURANT FURNITURE (INCL. ATTACHED FLOOR OR BLDG.) RESTAURANT/KITCHEN EQUIP. VENT HOODS, SINKS, ETC. (COMMERCIAL) RETURNABLE CONTAINERS ROLL-UP DOORS (INSIDE WALL) ROLL-UP DOORS (OUTSIDE WALL) ROOFING ROOM DIVIDERS/PARTITIONS - MOVEABLE OR BUILT-IN ROOMS SELF-CONTAINED OR SPECIAL PURPOSE(WALLS, CEILING, FLOOR) SAFES WALL OR SELF-STANDING SALES / USE TAX SATELLITE DISHES (ALL WIRING & INSTALLATION TO TV & EQUIP.) SCALE HOUSES (UNLESS MOVEABLE) SCALES SECURITY SYSTEMS SERVICE STATIONS EQUIPMENT - PUMPS, TANKS, LIFTS & RELATED SEWER SYSTEMS Section 3-Page 20
SHELVING SIGNS ALL TYPES INCLUDING ATTACHED TO BUILDING SINKS - BATHROOM SINKS - KITCHEN AREA SOFTWARE - CAPITALIZED SOUND SYSTEMS & PROJECTION EQUIPMENT SPARE PARTS - LIST AS SUPPLIES SPEAKERS - BUILT-IN OR FREESTANDING SPRAY BOOTHS SPRINKLER SYSTEM - ATTACHED TO PRODUCT STORAGE RACKS SPRINKLER SYSTEM - BUILDING SUPPLIES (OFFICE & OTHER) SWIMMING POOLS TANKS (ALL-ABOVE & BELOW GROUND) TELEPHONE SYSTEMS & WIRING - PRIVATE THEATRE SCREENS - INDOOR THEATRE SCREENS - OUTDOOR THEATRE SEATS TOOLING, DIES, MOLDS TOWERS - MICROWAVE, EQUIPMENT, WIRING & FOUNDATION TOWERS - TV, RADIO, CATV, TWO-WAY RADIO, WIRING & FDN TRANSPORTATION COST - ALL TUNNELS - UNLESS PART OF PROCESS SYSTEM UPGRADES TO EQUIPMENT VACUUM SYSTEM, PROCESS VAULT VAULT DOOR, INNER GATES, VENTS & EQUIP. VENDING MACHINES VENT FANS VENTILATION SYSTEMS - GEN'L BUILDING VENTILATION SYSTEMS - NEEDED FOR MANUFACTURING, PROCESS Section 3-Page 21
VIDEO TAPES/MOVIES/REEL MOVIES WALLCOVERING WALLS - PARTITIONS, MOVEABLE & ROOM DIVIDERS WATER COOLERS - ALL WATER LINES - FOR PROCESS ABOVE OR BELOW GROUND WATER SYSTEM - RESIDENTIAL OR GENERAL BUILDING WATER TANKS & SYSTEM - FOR PROCESS EQUIPMENT WHIRLPOOL/JACUZZI/HOT TUBS WIRING - POWER WIRING FOR MACHINERY AND EQUIP. Z END OF LIST Section 3-Page 22